Firms that get China right will have earned for themselves a self-reinforcing competitive advantage that will give them global power. Western firms still have a window of opportunity – but they have much less time than they seem to think. While most MNCs are trying to skim the cream of the super luxury market or to pass off tired platitudes as corporate strategy, Chinese firms are improving, reinvesting and expanding. Yesterday’s international champions like YUM and Caterpillar are stumbling, while Chinese powerhouses like Huawei and ZTE are moving from strength to strength.

China is emerging as the key to sustained global competitive advantage. A successful China operation will fund the winner’s drive towards global conquest, while a bad China strategy will be a money pit for those late to the game. China is clearly becoming a more competitive and challenging operating environment. US and Western firms are getting worse at managing it – and that has to start changing. Chinese laws are unfair to foreigners, its bureaucracy is a byzantine mess and its corporate structures an entrenched rat’s nest of insider connections, cronyism and outright corruption. Deal with it. (For the record, Asians have pretty much the same complaints about doing business in the US.)

In a post-crash global economy, the organization that gets China right will build a sustainable competitive advantage that will make it an industry leader. China represents a triple threat: it is market, supply chain and potential competitor, all in one.

China is now a triple threat:

1. Production / Supply Chain. Even as China gets more expensive, it is so deeply embedded in most firms’ supply chain that they can’t pull out. GE made big headlines earlier this year when it moved one small production line back to the US – but the truth is that regardless of what the label says, just about every manufactured good on sale anywhere in the world is going to have parts and assemblies that were made in China. The trend will be to design and engineer more in China – not less.

2. Market(s). The US is suffering a leadership crisis from Wall St to Main St to the Congress that simply doesn’t seem to be getting better. Europe is out. Lat-Am is looking sluggish and hung-over. The Mideast is a mess. Only China’s markets are strong and getting stronger. And while the luxury market looks great, the real story is still likely to be the urbanization of the 2nd – 4th tier regions.

3. Competition – this is the new one. China was never a real threat up until now, but even that seems to be changing. Lenovo, Huawei, ZTE – and GM’s partner SAIC have all become forces to reckon with in significant emerging markets that used to belong to American or European MNCs. If you want to beat the Chinese companies in your home market – then you’ve got to be able to fight successfully against them in their market.

The good news – it’s a new game since the financial crash of 2008. The expanding consumer markets, the tighter cost structures, the international focus are all new – and established MNCs are the only ones with the experience, the resources and the management to be effective on the global stage.

The bad news – it’s a new game, but most international management teams are still playing by the old rules. Americans still haven’t gotten the knack of integrating Chinese and Western management lines. When they try micromanaging and calling the shots from HQ, they suffer from their lack of familiarity and local business intelligence (i.e.: Caterpillar getting scammed by an accounting dodge that was apparently not all that complex ). When they try to leverage off local hires, they tend to delegate responsibility along with authority, which can lead to slipping standards and safety issues. (KFC, Carrefour)

The worse news – China seems to be getting better at creative destruction. This used to be one of hallmarks of American management. We were supposed to be the nimble ones, the creative ones, the dynamic ones. No matter how hard we fell, American management would come back stronger and quicker than ever. But the crash of 2008 was a bad story with a worse lesson – the only ones that came out stronger and richer were the criminals who caused the crisis. It’s the doctrinaire ideologues – the faceless Chinese Communist Party officials – who are responding to changes and shifting with the environment. American MNCs haven’t responded to the new post-crash situation in China with any coherent strategies or initiatives, and time is running out.

China as a source of enduring competitive advantage.

The three-pronged nature of the Chinese economy (production base, market, and competitor) means that it is an issue for all companies and leaders — not just those that consider themselves global or China plays. Just because you don’t have plans for China doesn’t mean that China doesn’t have plans for you. Don’t take solace from China’s troubles. The worse the situation in China, the more its companies will have incentive to look outside its own borders — and at yours.

China has an agenda. In the old days, it wanted capital. Now it has capital of its own. After that, China wanted technology. While it still looks to acquire the best and newest technology from the West, it has already managed to meet much of its tech needs – some it developed by itself, others it bought, borrowed or stole. One of the main reasons for China to invest abroad is to acquire resources and technologies. What China needs now more than anything is markets and customers. They think that they’ve already got their domestic market sewn up – and now they will be looking to expand.

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